Question

If you are bullish about stock T, discuss and appraise whether each of the following strategies is appropriate for yielding the greatest return if you are correct.

Strategy A: Buy stock T

Strategy B: Buy call options on stock T

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Answer 1

if we are bullish about the stock T that means we are hoping that price of the stock will going to increase in the future, so we take the strategy B because it gives us the right to buy a stock at a particular price in the future so as the price in the future goes up we will excersice the call option and buy stock at lower price and sell it into the market at higher price. and strategy A is also a n appropriate strategy because we will buy stock at lower price now and sell it into the market as the price increase in the future. the risk averse investor will take call option that will save him from the downside risk, while risk taker will buy the stock.

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